Microeconomics: Theory and Applications with Calculus, 4e

18.3 Market Power from Price Ignorance

We’ve seen that consumer ignorance about quality can keep high-quality goods out of markets. We now illustrate that consumer ignorance about price variation across firms gives firms market power. As a result, firms have an incentive to make it difficult for consumers to collect pricing information. Because of this incentive, some stores won’t quote prices over the phone.

If consumers (unlike sellers) do not know how prices vary across firms, firms may gain market power and set prices above marginal cost. Suppose that you go to Store A to buy a television set. If you know that Store B is charging $499 for the same TV, you are willing to pay Store A at most $499 (or perhaps a little more to avoid having to ...